Financial Scrutiny Unit Briefing Spending Review and Autumn Statement 2015

Transcription

1 The Scottish Parliament and Scottish Parliament Infor mation C entre l ogos. Financial Scrutiny Unit Briefing Spending Review and Autumn Statement December 2015 Financial Scrutiny Unit 15/77 The UK Spending Review and Autumm Statement was published on Wednesday 25 November 2015 and presents UK spending plans for the period to This briefing presents the Scottish Budget figures for this period, and compares them to the UK average. The Scottish Government will publish its Draft Budget on 16 December The briefing also includes some analysis of the OBR s devolved tax forecasts and the implications of the changes to the comparability factors presented in the Statement of Funding Policy and used to assess the degree to which a Budget is devolved. +5.2% +5.3% -2.2% -3.2% -3.9% -5.0% Overall Resource Capital Scotland UK

2 CONTENTS EXECUTIVE SUMMARY... 3 SCOTTISH BUDGET FOR SPENDING REVIEW PERIOD... 4 DEVOLVED TAX FORECASTS... 5 STATEMENT OF FUNDING POLICY COMPARABILITY FACTORS... 7 IMPACT OF NEW COMPARABILITY FACTORS... 9 SOURCES RELATED BRIEFINGS

3 EXECUTIVE SUMMARY The Chancellor presented the UK Spending Review to Parliament on 25 November 2015, outlining spending plans through to , and including Scottish spending allocations for the period. The Scottish Government s Budget, outlining how it plans to allocate spending in Scotland, will be published on 16 December The Chancellor s plans show that overall the total Departmental Expenditure Limit (DEL) in Scotland is planned to rise by 3.5% between the current financial year and , which is lower than the 5.3% increase for the UK as a whole. In real terms the Scottish Budget is expected to fall by 3.9% over the period to , compared to a fall of 2.2% in the UK as a whole. The Office for Budget Responsibility (OBR) published devolved tax forecasts, which included a substantial (- 142m) change in the Land and Buildings Transaction Tax (LBTT) forecast relative to their July 2015 publication. While this will have no impact on the Scottish Budget for , their forecasts could have implications for the devolved tax block grant adjustment in , which has yet to be agreed. The OBR forecast for devolved taxes is nearly 17% higher than the forecast. HM Treasury published a new Statement of Funding Policy alongside the Spending Review, which determines how changes to spending in England affect changes to the Scottish budget through the Barnett formula. There are comparability factors for each line of expenditure which, when combined with the population factor, determine the impact on the Scottish budget. There have been changes in the Local Government comparability factors and the introduction of a Business rates line. These changes mean that any changes in English Local Government funding have a far greater impact on Scottish Government funding than was previously the case. However, they also mean that Scotland, Wales and Northern Ireland are all treated in the same way with regard to changes in local government funding in England. The impact of the Statement of Funding comparability factor changes in Spending Review 2015 relative to Spending Review 2010 is a net reduction in the Scottish budget of approximately 600m over the period. 3

4 SCOTTISH BUDGET FOR SPENDING REVIEW PERIOD The tables below show the changes to the Scottish block grant as a result of the Spending Review. The first table shows changes in cash terms; the second is in real terms ( prices). Table 1: Scottish block grant, bn (cash) m Change to Resource DEL % (excluding depreciation) Capital DEL % Total DEL % Table 2: Scottish block grant, bn (real terms, prices) m Change to Resource DEL % (excluding depreciation) Capital DEL % Total DEL % Source: HM Treasury, 2015a Figure 1 presents the annual change in the Scottish Budget. It shows that the Scottish Budget is expected to grow in real terms next year ( ) before falling in real terms in each of the subsequent years of the Spending Review period. Figure 1: Total Scottish Departmental Expenditure Limit annual change Figure 2 shows how the Scottish Budget is projected to change, relative to the overall UK Departmental Expenditure limit. Overall the total Departmental Expenditure Limit (DEL) in Scotland is due to rise by 3.5% in cash terms between the current financial year and This is lower than the 5.3% increase in the UK as a whole. 4

5 Figure 2: Scottish and UK DEL change in cash terms ( to ) +13.3% +13.4% +3.5% +5.3% +2.3% +4.2% Overall Resource Capital Scotland UK Figure 3 shows the Scottish and UK DEL changes in real terms. It shows that overall the DEL in Scotland is due to fall by 3.9% between and , compared with a 2.2% fall for the UK as a whole. While capital spend allocations are due to increase in line with the UK, the resource allocation will decrease by 1.8 percentage points more than the UK. Figure 3: Scottish and UK DEL change in real terms ( to ), prices +5.2% +5.3% -3.9% -2.2% -5.0% The Scottish Government has said that the Scottish Resource DEL will fall by 5.7% in real terms between and (Scottish Government 2015), however has not published the baseline figure on which this calculation is based. It is understood that this will be laid out in the Draft Budget , due to be published on 16 December DEVOLVED TAX FORECASTS -3.2% Overall Resource Capital Scotland Forecasts for devolved taxes are a significant political issue as they could have a material impact on the extent to which Scotland s block grant is adjusted downwards to reflect Scotland s new tax-raising powers. This is known as the block grant adjustment (BGA). For the first year of devolved tax operation ( ), the Scottish and UK Governments, after months of discussion over the BGA, finally agreed a figure of 494m which was the mid-point of the Scottish Government and OBR forecasts. If a similar approach is taken for the BGA and the OBR s combined forecasts for devolved taxes are higher than the Scottish Government forecasts for , there is potential for a BGA that is higher than the Scottish Government s forecast tax receipts (depending on how agreement over a suitable BGA is reached). UK 5

6 Table 3: OBR forecasts for devolved Scottish taxes ( m) m LBTT Of which residential Of which commercial Landfill tax Total Source: OBR November 2015 As can be seen in figure 4 below, in the November 2015 forecast the OBR has significantly revised downwards its July forecast for LBTT by 142m from 540m to 397m. This change brings the combined forecast for devolved taxes for the current financial year to 537m (see table 3). This is more in line with the Scottish Government s forecast for devolved taxes of 498m. However, the OBR s combined devolved tax forecast for , at 627m, is nearly 17% higher than their latest forecast. We currently do not have Scottish Government forecasts beyond , and these will not be available until the Scottish Government Draft Budget is published on 16 December The Scottish Government and OBR use different methodologies to produce their forecasts for LBTT. The Scottish Government takes a bottom up approach and bases its methodology on numbers of transactions over a number of years. The OBR, on the other hand, uses a top down methodology, whereby it generally assumes a Scottish share of the overall UK housing market performance. 6

7 Figure 4: Scottish Government and OBR Forecasts for LBTT receipts in m 431m 381m 275m 397m Commercial 146m 205m 220m 235m 226m 264m 178m Residential January 2015 Scottish Government estimate March 2015 July 2015 November 2015 Office for Budget Responsibility (OBR) estimates STATEMENT OF FUNDING POLICY COMPARABILITY FACTORS Table 4 shows the differences in departments and comparability factors in the 2010 and 2015 Statements of Funding Policy ( Policy ). The most significant change in comparability factors is in CLG: Local Government (CLG: LG): it was 17.30% for Scotland in the 2010 Policy and is % in the 2015 Policy. The 2015 Policy also has a new line, Business Rates, which has a comparability factor of %. 7

8 Table 4: Comparability factors for Scotland, 2010 and Business, Innovation and Skills 66.4% 79.1% Business Rates 100.0% - Cabinet Office and SIA 6.5% 7.4% 1 Chancellor's Departments 0.4% 0.5% CLG: Communities 99.7% 99.5% CLG: Local Government 100.0% 17.3% Culture, Media and Sport 76.9% 96.0% Education 100.0% 100.0% Energy & Climate Change 1.8% 20.6% Environment, Food & Rural Affairs 99.8% 93.2% Health 99.4% 99.1% Home Office 91.7% 76.0% Justice 100.0% 99.7% Law Officers Departments 100.0% 100.0% Transport 91.0% 98.0% Work & Pensions 1.4% 0.0% Independent Bodies - 0.3% Source: HM Treasury 2010, 2015b This change resulted from an inconsistency highlighted by the Institute for Fiscal Studies (IFS). The changes to comparability factors now mean that Scotland, Wales and Northern Ireland are all treated in the same way with regard to changes in local government funding in England. Under the 2010 Policy, Scotland and Northern Ireland faced smaller cuts than Wales for a given percentage reduction in English local government funding. In a review of business rates and the Barnett formula, David Phillips of the IFS (2015) noted that the Barnett formula under the 2010 Policy exposed Scotland to two risks: Its own business rates revenue risk as business rates are devolved The risk of budget changes to CLG: LG being different from those of other departments servicing England (e.g. education). He highlighted that if the CLG: LG budget increased by less (or fell by more) than that of other departments, Scotland benefited from the fact that it received only a partial consequential from changes in CLG:LG s budget but full consequentials from changes in other departments budgets. Equally, Scotland would lose out if the CLG:LG budget increased by more (or fell by less) than other budgets. Assume for example that spending on education in England increases by 1 billion and spending on local government decreases by 1 billion. According to David Phillips, as overall government spending in England is unchanged in this example, the underlying logic of the Barnett formula is that the Scottish grant should also be unchanged (IFS 2015). However, in practice, Scotland would receive 100% of its population share of the increase in education funding, but only 17.8% of its population share of the decrease in local government funding, thus increasing its budget. According to the IFS, this flaw led to Scotland s budget being cut by 600 million less than it would have been under a corrected version of the Barnett formula as a result of the 2010 and 1 This is the comparability factor for the Cabinet Office only. 8

9 2013 Spending Reviews, and was also increased by 400 million more as a result of the Spending Reviews in the 2000s than it would have been under a corrected formula (IFS 2015). The 2015 Policy includes business rates as a negative spending (i.e. revenue) line with a comparability factor of 100.0%, alongside an updated comparability factor of 100.0% for CLG:LG. This new treatment recognises that business rates revenues in England partially fund some of the English departmental spending that enters the Barnett Formula, and that business rates and spending undertaken by CLG:LG in England are fully devolved to the Scottish Government. It means that each year, Scotland will see a reduction in its block grant equal to its population share of the increase in business rates revenues in England. If business rates revenues rise faster in Scotland than in England, the Scottish budget would be bigger than it otherwise would be and vice versa. Scotland also sees a change in its block grant equal to its population share of the change in CLG:LG spending in Scotland. These changes "correct the flaw" identified in the IFS report, albeit in a somewhat different way to that suggested by the IFS (IFS 2015, pp17-18) These two changes have separated funding to local government which is paid for by business rates and funding to local government which is funded by other means. This reflects the fact that business rates revenues do not represent a fixed percentage of local government funding. It also addresses the point raised by David Phillips on the risk that budget changes to CLG:LG may be different from those of other departments servicing England (e.g. education) and that this may be contrary to the spirit of the Barnett formula. IMPACT OF NEW COMPARABILITY FACTORS The Financial Scrutiny Unit (FSU) estimate that the net effect of the changes to the comparability factors has resulted in the Scottish DEL Resource Budget being reduced by approximately 600m over the course of the Spending Review period compared to the changes that would have occurred under the 2010 Policy. The vast majority of the changes result from the changes to the local government comparability factors. There are also minor changes resulting from changes to comparability factors for other departments, some of which have a positive impact on the Scottish budget. 9

10 SOURCES HM Treasury. (2010) Funding the Scottish Parliament, National Assembly for Wales and Northern Ireland Assembly: Statement of Funding Policy. London: HM Treasury. Available at: HM Treasury. (2015a) Spending Review and Autumn Statement. London: HM Treasury. Available at: ue_book_pu1865_web_accessible.pdf HM Treasury. (2015b) Statement of Funding Policy: funding the Scottish Parliament, National Assembly for Wales and Northern Ireland Assembly. London: HM Treasury. Available at: _of_funding_2015_print.pdf Institute for Fiscal Studies. (2015) Business as usual? The Barnett formula, business rates and further tax devolution. IFS: London. Available at: Office for Budget Responsibility. (2015) Economic and Fiscal outlook: Devolved tax forecasts. London: OBR. Available at: Scottish Government. (2015) Press release. Austerity continues as Chancellor imposes 6% cut. Available at: cut-1faa.aspx 10

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12 RELATED BRIEFINGS What does the Spending Review mean for the Scottish Budget? How have forecasts of Land and Buildings Transaction Tax changed over the last year? Scottish Parliament Information Centre (SPICe) Briefings are compiled for the benefit of the Members of the Parliament and their personal staff. Authors are available to discuss the contents of these papers with MSPs and their staff who should contact Ross Burnside on extension or Members of the public or external organisations may comment on this briefing by ing us at However, researchers are unable to enter into personal discussion in relation to SPICe Briefing Papers. If you have any general questions about the work of the Parliament you can the Parliament s Public Information Service at sp.info@scottish.parliament.uk. Every effort is made to ensure that the information contained in SPICe briefings is correct at the time of publication. Readers should be aware however that briefings are not necessarily updated or otherwise amended to reflect subsequent changes. Published by the Scottish Parliament Information Centre (SPICe), The Scottish Parliament, Edinburgh, EH99 1SP 12